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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 28, 2002
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to ________________
Commission file Number 0-22053
GENERAL BEARING CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2796245
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
44 High Street, West Nyack, New York 10994
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
-------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes |X| No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $5,197,000 at June 29, 2002.
At March 26, 2003, the Registrant had issued 7,102,200 shares of common stock,
$.01 par value per share, and had outstanding 3,867,380 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None of the documents indicated on Form 10-K have been incorporated herein by
reference.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements, which are statements other than those of
historical fact, including, without limitation, ones identified by the use of
the words: "anticipates," "believes", "estimates," "expects," "intends,"
"plans," "predicts," and similar expressions. In this Annual Report such
statements may relate to the recoverability of deferred taxes, likely industry
trends, the continued availability of credit lines, the suitability of
facilities, access to suppliers and implementation of joint ventures and
marketing programs. Such forward-looking statements involve important risks and
uncertainties that could cause actual results to differ materially from those
expected by the Company, and such statements should be read along with the
cautionary statements accompanying them and mindful of the following additional
risks and uncertainties possibly affecting the Company: the possibility of a
general economic downturn, which is likely to have an important impact on
historically cyclical industries such as manufacturing; significant price,
quality or marketing efforts from domestic or overseas competitors; the loss of,
or substantial reduction in, orders from a major customer; the loss of, or
failure to attain, additional quality certifications; changes in U.S. or foreign
government regulations and policies, including the imposition of antidumping
orders on the Company or any of its suppliers; a significant judgment or order
against the Company in a legal or administrative proceeding; and potential
delays in implementing planned sales and marketing expansion efforts and the
failure of their effectiveness upon implementation.
GENERAL BEARING CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
TABLE OF CONTENTS
No. Page
--- ----
PART I
Items 1 & 2. Business and Properties............................................................. 1
Item 3. Legal Proceedings................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................................. 7
Item 6. Selected Financial Data............................................................. 8
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................................. 9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk........................... 16
Item 8. Financial Statements and Supplementary Data......................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 50
Item 11. Executive Compensation.............................................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters......................................................... 54
Item 13. Certain Relationships and Related Transactions...................................... 56
Item 14. Controls and Procedures............................................................. 58
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 58
PART I
Items 1 and 2. Business and Properties.
The Company operates in two business segments: bearings ("Continuing
Operations") and machine tools ("Discontinued Operations"). In December of 2002,
the Company's Board of Directors and management resolved to discontinue the
operations of the machine tool segment by disposing of the net assets by sale.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", prior period
financial statements of the Company have been reclassified to segregate
discontinued operations from continuing operations.
CONTINUING OPERATIONS:
General Bearing Corporation ("General"), a Delaware Corporation formed in
1958, and subsidiaries (collectively, "the Company") manufactures, sources,
assembles and distributes a variety of bearings and bearing components,
including ball bearings, tapered roller bearings, spherical roller bearings and
cylindrical roller bearings. Under the Hyatt(R) and The General(R) trademarks,
the Company supplies original equipment manufacturers ("OEMs") and the
industrial aftermarket, primarily in the United States ("U.S.") and Asia. The
Company's products are used in a broad range of applications, including
automobiles, railroad cars, locomotives, trucks, heavy duty truck trailers,
office equipment, machinery and appliances.
The Company strives to be a reliable and cost effective provider of
bearings and bearing components. The Company's strategy includes the following:
* PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE. General
maintains a detailed and extensive Quality Assurance Program. It has been
certified to the M1003 standard by the Association of American Railroads
("AAR"); has been granted "Unconditional Approval" from the AAR for its tapered
journal bearings; maintains ISO 9001 registration from the International
Standards Organization ("ISO"); and maintains QS-9000 registration from the
Automotive Industry Quality System. General also requires that its suppliers
conform to Company and customer quality and engineering standards. Certain of
the Company's joint ventures have also achieved QS-9000 and/or ISO
certifications.
* PRESENCE IN CHINA. In 1987, General formed Shanghai General Bearing Co.,
Ltd. ("SGBC"), a joint venture in the People's Republic of China ("PRC") to
establish a low cost, quality controlled source for bearings and bearing
components. The Company has established other manufacturing joint ventures in
the PRC, and it continues to investigate further expansion opportunities. On
February 3, 1997, the U.S. Department of Commerce ("Commerce") granted SGBC
partial revocation of the antidumping order affecting tapered roller bearings
from the PRC. As a result, SGBC and the Company are no longer required to
participate in the annual reviews of the antidumping order conducted by
Commerce. The Company believes SGBC's revocation provides it with a competitive
advantage. Any disruption in the supply of bearings and bearing components from
the PRC could have a material adverse effect on the Company's business.
PRODUCTS
The Company sells approximately 2,500 stock keeping units ("SKU's"). The
Company's product line includes ball and roller bearings and their components.
The Company offers its products in standard, modified, and custom designs where
appropriate. Under The General(R) trademark, the Company produces ball bearings
for a wide variety of products including copying machines, automotive steering
columns, postal equipment, wheelchairs and other applications. Under the
Hyatt(R) brand, the Company produces select tapered roller bearings (TRB's),
tapered journal bearings, spherical roller bearings and cylindrical roller
bearings which are used in railroad, truck/trailer, automotive and other
industrial applications.
1
The following are the product classes which represented 10% or more of
consolidated revenue for the past three years:
2002 2001 2000
Automotive Driveline Components 14.27% 13.34% --
Tapered Roller Bearings 20.27% 26.31% 31.55%
Balls 19.95% -- --
MANUFACTURING
The Company primarily manufactures and assembles bearings at its
facilities in New York and the PRC as set forth below.
The Company obtains the majority of its bearing and component requirements
from its manufacturing plants in the PRC, discussed in greater detail below. The
Company maintains relationships with unaffiliated manufacturers to produce the
remainder of its requirements. The Company has no long-term contracts with its
unaffiliated manufacturing sources.
CHINESE MANUFACTURING
General has entered into six joint ventures (five with manufacturers in
the PRC) to enable it to manufacture high quality, low cost bearings and bearing
components. By entering into joint ventures, rather than long-term manufacturing
contracts, General is better able to monitor and control production and quality
assurance by having access to the factories at both management and production
levels. Further, by manufacturing at joint ventures, General may not be required
to incur inventory carrying costs, since the joint ventures may hold inventory
until needed by General.
SGBC, a joint venture formed with Shanghai Roller Bearing Factory ("SRBF")
was established in June 1987. SGBC produces various bearing products for the
U.S. and foreign markets. General contributed 25% of the initial capital of
SGBC, and General's joint venture partner, SRBF, contributed 75% of the initial
capital of SGBC. In November 2001, General and SRBF agreed to a new joint
venture contract whereby ownership would be shared equally, with General
assuming control of operations upon General meeting its revised requirement to
contribute an additional $3 million during the period 2002-2004. At March 24,
2003, General has satisfied $2 million of this requirement. The official
business license for the revised joint venture company was granted in February
2002.
General has the exclusive right to sell the products of SGBC in the U.S.
In 2002, General purchased $6.6 million in bearings and bearing components from
SGBC. Purchases are made upon terms and conditions established periodically by
negotiation between General and SGBC.
Ningbo General Bearing Company, Ltd. ("NGBC"), a joint venture with China
Ningbo Genda Bearing Company, Ltd., was established in 1998. Located in Yuyao
City, China, this venture manufactures ball and roller bearings and their
components. Initially, General contributed 33.3% of the registered capital.
Subsequently, General increased its ownership to 42% in 2000, and increased its
ownership to 50% and assumed control over operations in July 2001. In 2002,
General purchased $14.2 million from NGBC which has been eliminated in
consolidation.
Shanghai Pudong General Bearing Company ("SPGBC"), a joint venture with
Shanghai Xiua Industrial Corporation was established in 1996. Located in the
Pudong Industrial Zone of Shanghai, this venture produces various bearing
products for sale in the U.S. by General. General contributed 25% of the
registered capital of SPGBC, in 1998. In 2002, General purchased $300,000 from
SPGBC.
Jiangsu General Ball & Roller Company, Ltd. ("JGBR"), a joint venture with
Jiangsu Lixing Steel Ball Factory (Group) ("JSBF"), was established in 1999.
Located in Rugao City, China, this venture is comprised of the operations of
JSBF, a manufacturer of rolling elements for bearings. This venture produces
chrome, carbon and stainless steel balls. In March 2000, General formed NN
General, LLC ("NNG"), a joint venture with NN Ball & Roller, Inc. ("NN").
General and NN each held a 50% interest in NNG, which held a 60% interest in
JGBR. In December 2001, General purchased NN's 50% interest in NNG for cash and
notes valued at approximately $3.9 million (book value). On June 30, 2002, NNG's
ownership in JGBR was reduced to 51% by agreement of the partners, and in
conjunction with commitments by the partners to contribute additional capital
reflective of the new ownership percentages. In 2002, General purchased $164,000
from JGBR which has been eliminated in consolidation.
2
Rockland Manufacturing Company, ("Rockland") a 50% owned joint venture
with Wafangdian USA Ltd., was established in 1993 and shares facilities and
personnel with General at General's West Nyack facility. Rockland offers
flexibility to General by providing readily accessible inventory.
Wafangdian General Bearing Co., Ltd. ("WGBC"), a joint venture with
Wafangdian Bearing Company, produces various bearing components. General sells
the WGBC bearings in the U.S. In 2002, Rockland paid $1.9 million for purchases
from WGBC.
SALES, MARKETING AND CUSTOMERS
The Company markets its products principally in the U.S. through 8
salaried sales employees and 29 commissioned independent sales representative
organizations. In addition, the Company has 10 customer service representatives
responsible for handling orders and providing sales support. Products bear The
General(R) label for ball bearings and the Hyatt(R) brand for all types of
roller bearings.
The Company's OEM markets include truck/trailer manufacturers, railroad
locomotive and freight car manufacturers, and automotive manufacturers. Beyond
the transportation industry, the Company supplies precision ball bearings to
manufacturers of office equipment, machinery and appliances.
In addition to the OEM efforts, the Company markets a broad line of
products through distributors. The Distribution customer base varies from the
two largest multi-branch operations, which have in excess of 400 branches, to
independent single outlet operations. The Company provides distributors with a
high quality lower cost alternative for them to service their maintenance repair
order customers as well as small / medium sized OEM's.
In 2002, 2001 and 2000, sales to a customer, Visteon Corporation,
represented more than 10% of the Company's total net sales.
Shipments to OEMs can be within one to 365 days from the date an order is
placed. Actual shipments are dependent upon production schedules of the
Company's customers. Product is generally shipped to distributors within 24
hours of the time an order is placed. The Company's arrangements with its
customers typically provide that payments are due within 30 days following the
date of shipment of goods.
In order to timely meet the delivery requirements of customers, the
Company maintains significant amounts of inventory.
Our total backlog at year end 2002 and 2001 was $10,200,000 and
$8,900,000, respectively. The Company anticipates that approximately $10,200,000
of the 2002 backlog will be filled in 2003. The Company believes that backlog is
not necessarily a reliable indicator of our future sales because a substantial
portion of the orders constituting this backlog may be cancelled at the
customer's option.
EMPLOYEES
The Company's bearing operations have 1,001 full-time employees, of whom
862 were engaged in production, shipping and receiving, quality control, and
maintenance, and 22 of whom were engaged in sales and marketing. The balance of
the Company's full-time employees is primarily administration. Seventy eight of
the Company's employees engaged in production, shipping and receiving, quality
control and maintenance are subject to collective bargaining and are represented
by the United Brotherhood of Carpenters and Joiners of America, AFL-CIO, Local
3127 ("Union"). The current collective bargaining agreement with the Union
expires on April 30, 2003. The Company believes that relations with its
employees, including those subject to collective bargaining, are good. General
has a 23 year relationship with the Union and has never experienced a Union work
stoppage.
3
COMPETITION
The ball and roller bearing industry is highly competitive. The Company
believes that competition within the precision ball and roller bearing market is
based principally on quality, price and the ability to meet customer delivery
requirements. Among the Company's primary domestic and foreign competitors are
Timken, NSK Corporation and NN Inc. Management believes that the Company's
manufacturing and sourcing capabilities and its reputation for consistent
quality and reliability have positioned the Company for continued growth.
PATENTS, TRADEMARKS AND LICENSES
The Company owns The General(R) trademark and the Hyatt(R) trademarks. The
Company does not own any other U.S. or foreign patents, trademarks or licenses
that are material to its business.
During 2001, the Company purchased the Hyatt(R) trademark from an
affiliate of General Motors ("GM"). Prior to this, the Company's use of the
Hyatt(R) trademark was pursuant to a license from GM. The Company believes the
trademarks positively influence some customers but is unable to quantify or
estimate the extent of the benefits.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to federal, state and local
regulatory requirements relating to pollution control and protection of the
environment. Based on information compiled to date, management believes that the
Company's current operations materially comply with applicable environmental
laws and regulations.
PROPERTIES
The Company leases a facility located in West Nyack, New York, which has
approximately 190,000 square feet of floor space. Management believes that the
plant is adequate for the Company's present needs and anticipated expansion. The
West Nyack facility, which is used principally for administrative, assembly,
manufacturing, and distribution purposes, is owned by Gussack Realty Company
("Realty"). On November 1, 1996, the Company and Realty entered into a lease for
the West Nyack facility ("Lease"), which provides for an initial term expiring
on October 31, 2003, and is renewable at the option of the Company for an
additional six year term. (See "Item 13 - Certain Relationships and Related
Transactions.")
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The amounts of sales and long-lived assets attributable to each of the
principal geographic areas where the Company has sales and the amount of export
sales from the U.S. for each of the last three fiscal years are set forth in
Note 17 to the Company's consolidated financial statements for the year ended
December 28, 2002.
DISCONTINUED OPERATIONS:
In December of 2002, the Company's Board of Directors and management
resolved to discontinue the operations of the machine tool segment by disposing
of the net assets by sale during 2003. During 2002, the Company reduced the net
asset carrying amounts of machine tools to zero and recorded an impairment
writedown associated with discontinued operations of approximately $2,242,000.
The prior period financial statements of the Company have been reclassified to
segregate continuing operations from discontinued operations.
The Company's machine tool operations are conducted through three
companies, World Machinery Group, BV ("WMG"), World Machinery Works, S.A. ("W.M.
Works") and WMW Machinery Company, Inc. ("WMW"), all direct or indirect
subsidiaries of World Machinery Company ("World"), which became a wholly owned
subsidiary of General in July 2000.
WMG, a 60% owned subsidiary, owns 60% of W.M. Works, a Romanian machine
tool manufacturer, which was privatized by the Romanian government in 1998. The
Company contributed $1.5 million of the $2.5 million that WMG paid for the 51%
interest in W.M. Works and, under the share sale contract with the Romanian
government, was obligated to invest an additional $5.2 million in W.M. Works in
cash or in kind, over a four year period ending December 31, 2002. As of
December 28, 2002, the Company had satisfied its investment obligation for which
it received an additional 9% interest in W.M. Works. WMG has the exclusive right
to market the primary products of W.M. Works outside of Romania, with some minor
exceptions.
4
PRODUCTS
W.M. Works, formerly known as Masini Unelte, Bacau, S.A., a Romanian
corporation, produces a variety of machine tools used for boring, turning,
milling and grinding metal work pieces. W.M. Works' product lines include
horizontal boring mills, bridge and gantry mills, vertical turning lathes, heavy
duty lathes, roll grinders, belt grinders and vertical grinders.
WMW, a wholly owned subsidiary of General, is WMG's sole sales agent in
North America for most of the machine tool products manufactured by W.M. Works.
WMW also markets its own product lines of WMW HECKERT production milling
machines and WMW Radial Drills of 2" to 8" capacity, manufactured by independent
suppliers abroad. In addition, WMW imports and distributes CETOS grinding
machines from the Czech Republic.
SALES, MARKETING AND CUSTOMERS
The majority of W.M. Works export sales are made through WMG, which
utilizes independent regional sales agencies in each sales territory. WMG
presently has approximately 5 sales agencies with exclusive distribution rights
in North America, Germany, India, Poland and Argentina. WMG also markets through
approximately 17 non-exclusive agents covering Italy, China, Denmark, the former
Soviet states, Finland, Turkey, Greece, Austria, Egypt, the United Kingdom, the
Czech Republic, Belgium, Holland, Brazil, South Africa, Pakistan, Vietnam and
Taiwan.
WMW sells primarily in North America through approximately 150 independent
machine tool dealers on a non-exclusive basis.
The machine tools produced by W.M. Works and WMW are sold to a wide
spectrum of customers, from large corporations to small job shops. W.M. Works
also produces the mechanical components of machines for certain machine tool
producers in Germany.
No individual customers of W.M. Works and WMW represented 10% or more of
the Company's sales in 2002, 2001 and 2000.
EMPLOYEES
The Company's machine tool operations have 492 employees, located
primarily in Romania, of whom 329 are in production, 19 are sales personnel, 56
are in-house technical engineers (both mechanical and electrical) and
technicians, 56 are in design and the balance are administrative.
COMPETITION
The machine tool industry is highly competitive. The principal competitors
of W.M. Works and WMW are Tos Varnsdorf (Czech Republic), Union
Werkzeugmaschinen (Germany), Defum (Poland), Mitsubishi (Japan), Giddings &
Lewis (USA), Juristi (Spain), Toshiba (Japan), Dorris-Schamann (Germany),
Phoenix (USA), Karnaghi (Italy), Waldrich (Germany), Hercules (Germany), Cetos
(Czech Rep.) and Landis (USA).
PATENTS, TRADEMARKS AND LICENSES
Except for the WMW(R) and WMW Heckert(R) trademarks owned by WMW in the
United States, neither WMW, W.M. Works nor WMG own any U.S. or foreign patents,
trademarks or licenses that are material to their businesses.
5
ENVIRONMENTAL COMPLIANCE
WMW and W.M. Works's operations are subject to governmental regulatory
requirements relating to pollution control and protection of the environment.
Based on information compiled to date, management believes that all current
machine tool operations materially comply with applicable environmental laws and
regulations.
PROPERTIES
W.M. Works owns and manufactures at a facility of approximately 680,000
sq. ft. in Bacau, Romania. Management believes the plant is adequate for all
present and future needs of W.M. Works. WMW operates at the Company's principal
facilities in West Nyack, NY and has a leased sales office in Brea, California.
Item 3. Legal Proceedings.
Antidumping Proceeding covering Ball Bearings and Parts thereof from China.
In its 10-K filed on April 15, 2002, the Company disclosed the filing of an
Antidumping proceeding (the "Proceeding") in the U.S. International Trade
Commission ("ITC") and U.S. Department of Commerce ("DOC") by the American
Bearing Manufacturer's Association ("ABMA"), seeking to impose antidumping
duties on ball bearings and parts thereof from the People's Republic of China.
On April 3, 2003, by a vote of 4 to 0, the ITC found that the United States ball
bearing industry has not been materially injured or threatened with material
injury by imports of ball bearings from China.
As a result, no antidumping duties or deposits will be imposed on imports of
ball bearings from PRC.
Arbitration Proceeding against World Machinery Company
On December 30, 2002, the Romanian authority for Privatization and Management of
State Ownership ("APAPS") filed a Request for Arbitration against World, with
the International Chamber of Commerce. The action arises out of the contract
under which World acquired a majority interest in W.M. Works from the Romanian
government in 1998 (the "Contract"). APAPS alleges that World breached its
contractual obligation to invest certain sums in W.M. Works in 1999 and 2000, as
required under the Contract. APAPS is seeking $570,000 in penalties and damages,
together with interest and costs, and any further damages and penalties to which
it would be entitled if it establishes that World also failed to make
investments required in 2001 and 2002.
World's management believes it has fully complied with its investment
obligations and has filed an Answer with the ICC disputing the allegations and
will vigorously defend the action. World is also considering the filing of
claims against APAPS based on APAPS' breach of the Contract by failing to honor
a representation and warranty as to the financial condition of W.M. Works, and
other acts of the Romanian government which have caused damages to World and
W.M. Works.
While the Company is confident that it will prevail in the arbitration, an
adverse ruling could be materially adverse to World's operations and financial
condition.
Arbitrators have been selected and the parties are awaiting scheduling from the
ICC.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been quoted on the NASDAQ Small Cap market
under the symbol "GNRL" since the Company's initial public offering effective
February 7, 1997.
The following charts set forth the high and low bid prices for each
quarterly period in the last two fiscal years.
2002
---------------------
Bid Prices High Low
-------- --------
1st Quarter 3.670 2.600
2nd Quarter 4.050 3.100
3rd Quarter 4.250 2.810
4th Quarter 3.120 2.680
2001
---------------------
Bid Prices High Low
-------- --------
1st Quarter 6.310 4.750
2nd Quarter 5.940 3.150
3rd Quarter 3.790 2.270
4th Quarter 3.470 2.580
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for future growth
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future.
At March 26, 2003, the Company had in excess of 500 holders of its Common
Stock.
7
Item 6. Selected Financial Data
Pursuant to SFAS No. 144, the selected financial data set forth below for
the statement of operations has been reclassified to segregate discontinued
operations from continuing operations (see Business and Properties Items 1 and
2). Any line item on the Statement of Operations above the net income line not
designated as relating to discontinued operations, relates solely to continuing
operations.
The selected financial data set forth below is derived from the Company's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. See Management Discussion and Analysis of Results of Operations
and Financial Condition.
General Bearing Corporation
Selected Financial Data
(In Thousands Except for Per Share Data)
Years Ended
Jan. 2 Jan. 1 Dec. 30 Dec. 29 Dec. 28
1999 2000 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Sales $ 45,446 $ 51,789 $ 50,270 $ 44,474 $ 60,306
Operating income $ 4,217 $ 5,293 $ 4,250 $ 2,674 $ 4,422
Income from continuing operations before income tax $ 3,795 $ 4,562 $ 3,907 $ 985 $ 2,625
Minority interests $ (34) $ (27) $ (8) $ 405 $ 672
Income from continuing operations $ 2,073 $ 2,685 $ 2,552 $ 368 $ 848
Income / (loss) from discontinued operations $ (1,275) $ (441) $ (673) $ 270 $ (2,932)
Net income / (loss) $ 798 $ 2,244 $ 1,879 $ 638 $ (2,084)
Net income per basic share from
continuing operations $ 0.51 $ 0.65 $ 0.62 $ 0.09 $ 0.22
Net income per diluted share from
continuing operations $ 0.50 $ 0.65 $ 0.62 $ 0.09 $ 0.22
Net income/(loss) per basic share $ 0.19 $ 0.55 $ 0.46 $ 0.16 $ (0.54)
Net income/(loss) per diluted share $ 0.19 $ 0.55 $ 0.46 $ 0.16 $ (0.54)
8
As Of
Jan. 2 Jan. 1 Dec. 30 Dec. 29 Dec. 28
1999 2000 2000 2001 2002
- --------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total current assets $34,907 $38,778 $38,778 $50,819 $49,099
Total assets $45,812 $53,340 $55,264 $76,624 $75,413
Long-term debt (excluding current
portion) $ 1,951 $12,861 $16,454 $20,580 $ 8,563
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Business Overview
General Bearing Corporation and subsidiaries (collectively, the "Company")
operates in two business segments: Bearings ("Continuing Operations") and
Machine Tools ("Discontinued Operations"). In December 2002, the Company's Board
of Directors and management resolved to discontinue the operations of the
machine tool segment by disposing of the net assets by sale during 2003. During
2002, the Company reduced the net asset carrying amounts of machine tools to
zero and recorded an impairment writedown associated with discontinued
operations of approximately $2,242,000. Pursuant to SFAS No. 144, the financial
statements of the Company have been reclassified to segregate discontinued
operations from continuing operations.
Continuing Operations:
The Company manufactures and distributes a variety of bearings and bearing
components under the Hyatt(R) and The General(R) trademarks. The Company
supplies original equipment manufacturers ("OEMs") and distributors. The
Company's products, sold principally in the United States ("U.S.") and Asia, are
used in a broad range of applications, including automobiles, railroad cars,
locomotives, trucks, heavy duty trailers, office equipment, machinery and
appliances. General has entered into six joint ventures (5 with manufacturers in
the Peoples Republic of China ("PRC")) to enable it to manufacture high quality,
low cost bearings and bearing components. General obtains a majority of its
bearing and component requirements from its manufacturing plants in the PRC.
In July 2001, General Bearing Corporation ("General") increased its ownership in
Ningbo General Bearing Company, Ltd. ("NGBC"), one of its joint ventures in
China, from 42% to 50% and assumed control of management of the operations. The
financial statements of NGBC have been fully consolidated beginning with the
start of the third fiscal quarter of 2001. The majority of NGBC's sales are
eliminated in consolidation as the majority of its production is sold to General
for sale in the U.S.
In December 2001, General increased its ownership in NN General, LLC ("NNG")
from 50% to 100%. NNG is a holding company that held as its primary asset, a 60%
investment in Jiangsu General Ball and Roller Company, Ltd. ("JGBR"), another
Chinese joint venture. Due to this increased ownership, the operations of NNG
and JGBR have been fully consolidated since the beginning of the first quarter
of 2002. On June 30, 2002, NNG's ownership in JGBR was reduced to 51% by
agreement of the partners, and in conjunction with commitments by the partners
to contribute additional capital reflective of the new ownership percentages.
Discontinued Operations:
In the Machine Tools segment, the Company produces and distributes a variety of
machine tools used for boring, turning, milling and grinding metal work pieces.
The Company's product lines include horizontal boring mills, bridge and gantry
mills, vertical turning lathes, heavy duty lathes, roll grinders, belt grinders
and vertical grinders.
9
Results of Operations
Fiscal 2002 compared to Fiscal 2001
Sales. Sales for the fiscal year ended December 28, 2002 ("2002") of
$60,306,000 represents a 35.6% increase compared to the fiscal year ended
December 29, 2001 ("2001") primarily due to the consolidation of JGBR sales.
Additionally, increased sales of driveline components to the automotive
industry, tapered roller bearings for heavy duty truck trailers and tapered
journal bearings to the railroad industry were partially offset by lower sales
volume in the heavy duty aftermarket as well as lower sales volume to
distributors. The reductions in the sales to the heavy duty aftermarket and
distributors are believed to be related to the general downturn of the U.S.
economy.
Gross Profit. Gross profit for 2002 of $17,155,000 represents a 29.9%
increase compared to 2001. As a percentage of sales, gross profit ("GP%") was
28.4% for 2002 compared to 29.7% in 2001. This decrease was mainly due to
product mix as well as the consolidation of JGBR's sales to the Chinese domestic
market, which have lower GP% than General's sales in the U.S.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") as a percentage of sales were 21.1% in 2002
compared to 23.7% in 2001. The decrease in S,G&A, as a percentage of sales, is
primarily due to higher sales volume. S,G&A increased by $2,205,000 in 2002
mainly due to the consolidation of the S,G&A expenses of NNG ($1,187,000) and
NGBC ($669,000). Additionally, 2002 S,G&A includes $500,000 in costs associated
with the start up of the Ball and Roller Division, as well as increases in
freight, professional fees, depreciation, and insurance partially offset by
reductions in bad debts.
Operating Income. Operating income for 2002 of $4,422,000 represents a
65.4% increase compared to 2001 due to higher sales volume and the consolidation
of JGBR, partially offset by lower GP% and higher S,G&A.
Other Expense, net. Other expense, net was $1,797,000 in 2002 compared to
$1,689,000 in 2001 and is comprised of miscellaneous non-operating income and
expenses, interest expense, and equity in income / loss of affiliates ("equity
income") as follows: (in thousands)
2002 2001
------- -------
Litigation settlement $ 0 $ 763
Interest expense, net 1,597 986
Equity (income) / loss in affiliates 193 (60)
Other non-operating expenses, net 7 0
------- -------
$ 1,797 $ 1,689
2001 included a charge of $763,000 for an agreement reached between the Company
and Gussack Realty Company ("GRC"), allocating the proceeds and litigation costs
from the previously reported litigation with Xerox. The reimbursement is being
paid to GRC in the form of additional rent payments by the Company of $18,780.17
per month for 48 months beginning in June 2001. Even though the Company was not
legally or contractually obligated to reimburse GRC, a related party, the
Company agreed to enter into the reimbursement agreement because the Company
believed it was fair and equitable to do so as Realty had paid legal expenses
for the benefit of the Company.
Interest expense, net increased in 2002 mainly due to the consolidation of
interest expense incurred at JGBR and increased borrowings.
Income tax. The Company recorded income tax expense of $1,105,000 in 2002
compared to income tax expense of $212,000 in 2001. The Company's effective
income tax rate was 42.1% in 2002 compared to 21.5% in 2001. The 2002 effective
rate is reflective of taxes being provided for previously earned foreign income
originally expected to be permanently reinvested.
10
Discontinued Operations. Machine tools sales of $8,613,000 were 23.0%
lower than 2001 primarily due to lower export sales from Romania due to
irregularity in demand for the Company's products. GP% for machine tools was
28.5% in 2002 compared to 38.6% in 2001. The decrease is mainly due to lower
sales volume and product mix. S,G&A for machine tools increased by $4,000 in
2002 compared to 2001. Operating loss for machine tools was $1,632,000 in 2002
compared to operating income of $227,000 in 2001 due to the lower sales volume
and lower GP%. Other expense, net was $506,000 in 2002 compared to $28,000 in
2001 due to higher interest expense at W.M. Works relating to increased debt.
The net loss for machine tools was $2,932,000 in 2002 compared to net income of
$270,000 in 2001. The net loss consists of a loss from operations of $690,000
and a business impairment charge of $2,242,000.
Net Income. Net loss for 2002 was $2,084,000 or ($.54) per basic and
diluted share compared to net income of $638,000 or $.16 per basic and diluted
share in 2001 primarily due to the loss from operations and the effect of the
impairment charge in the Machine Tool segment, partially offset by higher sales
volume in the Company's continuing operations.
Fiscal 2001 compared to Fiscal 2000
Sales. Sales for the fiscal year ended 2001 of $44,474,000 represents an
11.5% decrease compared to the fiscal year ended 2000 ("2000") primarily due to
the economic slowdown that began during the second half of 2001. The largest
decrease was due to lower sales volume of tapered roller bearings for heavy duty
truck trailers, however other product lines were also negatively affected.
Gross Profit. Gross profit for 2001 of $13,202,000 represents a 15.1%
decrease compared to 2000. As a percentage of sales, GP% was 29.7% for 2001
compared to 30.9% for 2000. This decrease was mainly due to lower sales volume
and introductory pricing necessary to increase market share.
Selling, General and Administrative Expenses. S,G&A as a percentage of
sales was 23.7% in 2001 compared to 22.5% in 2000. The increase in S,G&A as a
percentage of sales is primarily due to decreased sales volume, partially offset
by reduced expenses. S,G&A decreased by $770,000 mainly due to lower sales
related variable costs, promotion expense and legal expense, partially offset by
higher bad debt expense.
Operating Income. Operating income for 2001 of $2,674,000 represents a
37.1% decrease compared to 2000 primarily due to lower sales volume and lower
GP%, partially offset by lower S,G&A.
Other Expenses, net. Other expenses, net was $1,689,000 in 2001 compared
to $343,000 in 2000 mainly due to reduced equity in income of affiliates
("equity income") and a one-time charge as described below. Net interest expense
was $986,000 in 2001 compared to $1,012,000 in 2000. Equity income was $60,000
in 2001 compared to $669,000 in 2000. Lower sales to General due to economic
conditions in the U.S. reduced the earnings of its joint ventures. The
consolidation of NGBC's financial statements also caused a decrease in equity
income. Additionally, the 2000 equity income includes the Company's share of net
earnings from a joint venture prior to the inclusion of an additional partner.
2001 also includes a one-time charge of $763,000 for an agreement reached
between General and GRC, allocating the proceeds and litigation costs from the
previously reported litigation with Xerox (see the Company's report on Form 8-K
dated May 29, 2001 as well as the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 2000.) Even though the Company was not legally or
contractually obligated to reimburse GRC, a related party, the Company agreed to
enter into the reimbursement agreement because the Company believed it was fair
and equitable to do so as Realty had paid legal expenses for the benefit of the
Company. The reimbursement, due to GRC in the form of additional rent payments
by General of $18,780.17 per month for 48 months, commenced in June 2001.
Income Tax. The Company recorded income tax expense of $212,000 in 2001
compared to $1,363,000 in 2000. The Company's effective income tax rate was
21.5% in 2001 compared to 34.9% in 2000. The 2001 effective rate is reflective
of income taxes not being provided for on certain foreign income expected to be
permanently reinvested. The 2000 effective rate reflects a normal rate of
taxation.
Discontinued Operations. Machine tool sales of $11,179,000 were 22.5%
higher than 2000 due primarily to the continued development of markets for the
Company's plant in Romania, partially offset by slower economic conditions in
the United States. GP% for machine tools was 38.6% in 2001 compared to 32.1% in
2000. This increase is mainly due to higher sales volume. S,G&A for machine
tools decreased by $1,231,000 mainly due to reduced bad debt expenses and lower
costs for trade conventions as well as the implementation of cost reduction
programs to offset the economic conditions in the United States. Operating
income for Machine Tools increased to $227,000 in 2001 compared to a loss of
$2,389,000 in 2000 primarily due to higher sales volume and reduced S,G&A. Other
expense, net was $28,000 in 2001 compared to income of $44,000 in 2000.
11
Net Income. Net income for 2001 decreased 66.0% from 2000 to $638,000 or
$.16 per basic and diluted share, from $1,879,000 or $.46 per basic and diluted
share in 2000, primarily due to lower sales volume and increased other expenses,
net, partially offset by reduced S,G&A.
Financial Condition, Liquidity and Capital Resources
During the three years ended December 28, 2002, the Company's primary
sources of capital have been net cash provided by operating activities and a
Revolving Credit Facility. The primary demands on the Company's capital
resources have been investments in and advances to affiliates (joint ventures)
and fixed asset purchases made to broaden the Company's product offering and
improve operations. At December 28, 2002 and December 29, 2001, the Company had
working capital of $14,201,000 and $30,276,000, respectively. The reduction in
working capital is attributable to the reclassification of the revolving line of
credit as short term as the agreement expires on June 30, 2003. The Company
expects to enter into a new Revolving Credit Facility upon its expiration.
Cash provided by operating activities in 2002 was $2,346,000. Cash
provided from net income before the loss on impairment of the discontinued
operations, depreciation and amortization, reduced accounts receivable and
increased accounts payable and accrued expenses was partially offset by
increased inventory and prepaid expenses and other assets. The increase in
accounts payable and accrued expenses is primarily due to higher inventory in
transit.
Cash used in investing activities in 2002 was $7,374,000. General invested
cash of $820,000 in SGBC as part of the new joint venture contract whereby
ownership will be shared equally, with General assuming control of operations
upon meeting its revised investment requirement. Cash used in investing
activities also includes $6,587,000 for capital expenditures. The majority of
the capital expenditures is related to the growth of NGBC and JGBR.
Cash provided by financing activities in 2002 was $6,339,000. During 2002,
the Company had a net increase in debt under its revolving credit facility of
$1,711,000 and a net increase of $5,701,000 in Notes payable - banks mainly to
finance payments for capital equipment to support the growth of NGBC and JGBR.
The Company used cash of $720,000 for stock repurchases under the Company's
Stock Repurchase Program ("the Program") and repaid $153,000 against its lease
finance facility.
At December 28, 2002, the Company had outstanding debt of $14,458,000
under its Revolving Credit Facility and had further availability of
approximately $6.0 million. The Company expects to enter into a new Revolving
Credit Facility upon its expiration. The Company is in compliance with all of
its loan covenants.
During 2002, the Company repurchased 194,550 shares of its common stock
for a cost of $720,000 under its Program. The Company has purchased 284,820
shares for a cost of $996,000 since the inception of the Program on January
11,2000.
The Company believes that funds generated from continuing operations,
capital lease financing and borrowing under the existing and any future
revolving credit facilities will be sufficient to finance the Company's
investment commitments, anticipated working capital and capital expenditure
requirements for at least the next 24 months. The Company's operating cash flow
could be adversely affected if there was a decrease in demand for the Company's
products, if the Company was unable to continue to reduce its inventory, or if
General was unable to renew or replace the revolving credit facility when the
current facility expires on June 30, 2003. The table and notes below describe
the Company's contractual obligations related to its liquidity.
12
Payments Due by Period
-----------------------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Total year years years years
------- ------- ------- ------- -------
Contractual Obligations:
Bank revolving line of credit $14,458 $14,458 $ -- $ -- $ --
Notes payable - banks 11,377 7,114 3,659 604 --
Notes payable - other 3,105 200 2,905 -- --
Capital lease obligations 467 196 271 -- --
Other long term liabilities - affiliate 1,123 -- 1,123 -- --
------- ------- ------- ------- -------
Total obligations - per Balance Sheet 30,530 21,968 7,958 604 --
Off Balance Sheet items:
Operating leases 6,414 1,323 3,857 1,234 --
Investment obligations 1,281 281 1,000 -- --
------- ------- ------- ------- -------
Total contractual cash obligations $38,225 $23,572 $12,815 $ 1,838 $ --
======= ======= ======= ======= =======
Pursuant to requirements imposed in 1993 by the United States Office of Foreign
Assets Control ("OFAC"), at the end of 2002 the Company also carried on its
books a $619,000 net payable ("IKL payable") to General IKL Corp., an affiliate.
The requirement arose out of sanctions imposed by the U.S. government on the
countries comprising the former Republic of Yugoslavia, "freezing" certain
assets in the United States. In February, 2003, OFAC "unfroze" assets affected
by the sanctions and the Company reduced a significant portion of the IKL
payable which the Company disputed.
The Company uses letters of credit to support certain advance payments received
from customers in the normal course of business.
Inflation
The effect of inflation on the Company has not been significant during the
last three fiscal years.
Recent Accounting Standards
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138 ("FAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" which amended FAS
133. The amendments in FAS 138 address certain implementation issues and relate
to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized foreign currency
denominated assets and liabilities, and intercompany derivatives.
Effective December 31, 2000, the Company adopted FAS 133 and FAS 138. The
initial impact of adoption on the Company's financial statements was recorded in
2001 and was not material. The ongoing effect of adoption on the Company's
consolidated financial statements will be determined each quarter by several
factors, including the specific hedging instruments in place and their
relationships to hedged items, as well as market conditions at the end of each
period.
13
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company adopted
SAB 101 in 2000 and there was no material effect on the Company's operating
results.
The consolidated financial statements reflect, for all periods presented,
the adoption of the classification requirements pursuant to Emerging Issues Task
Force ("EITF") 00-10, Accounting for Shipping and Handling Fees and Costs, EITF
00-14, Accounting for Certain Sales Incentives, and EITF 00-22, Accounting for
"Points" and Certain Other Time Based or Volume Based Sales Incentive Offers,
and Offers for Free Products to be Delivered in the Future, which were effective
in the Company's fourth quarter of 2000. The Company reclassified to "Net sales"
income from freight charged to customers, and the cost of rebates provided to
customers pursuant to promotional incentive programs, which were historically
included in "Selling, general and administrative" expenses for all periods
presented.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
pronouncement eliminated the use of the "pooling of interests" method of
accounting for all mergers and acquisitions. As a result, all mergers and
acquisitions will be accounted for using the "purchase" method of accounting.
SFAS No. 141 is effective for all mergers and acquisitions initiated after June
30, 2001. Adoption of this pronouncement had no impact on the Company's
financial results.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
intangible assets (excluding goodwill) acquired individually or with a group of
other assets at the time of their acquisition. It also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. Intangible assets (excluding goodwill) acquired outside of a
business combination will be initially recorded at their estimated fair value.
If the intangible asset has a finite useful life, it will be amortized over that
life. Intangible assets with an indefinite life are not amortized. Both types of
intangible assets will be reviewed annually for impairment and a loss recorded
when the asset's carrying value exceeds its estimated fair value. The impairment
test for intangible assets consists of comparing the fair value of the
intangible asset to its carrying value. Fair value for goodwill and intangible
assets is determined based upon discounted cash flows and appraised values. If
the carrying value of the intangible asset exceeds its fair value, an impairment
loss is recognized. Goodwill will be treated similar to an intangible asset with
an indefinite life. As required, the Company adopted SFAS No. 142 effective
December 30, 2001. The Company believes that the adoption of this pronouncement
will not have a material impact on the Company's financial results.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the period
it is incurred. This cost is initially capitalized and amortized over the
remaining life of the underlying asset. Once the obligation is ultimately
settled, any difference between the final cost and the recorded liability is
recognized as a gain or loss on disposition. As required, the Company will adopt
SFAS No. 143 effective January 1, 2003. The Company believes that the adoption
of this pronouncement will not have a material impact on the Company's financial
results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets." This pronouncement addresses how
to account for and report impairments or disposals of long lived assets. Under
SFAS No. 144, an impairment loss is to be recorded on long lived assets being
held or used when the carrying amount of the asset is not recoverable from its
expected future undiscounted cash flows. The impairment loss is equal to the
difference between the asset's carrying amount and estimated fair value. In
addition, SFAS No. 144 requires long lived assets to be disposed of by other
than a sale for cash to be accounted for and reported like assets being held and
used. Long lived assets to be disposed of by sale are to be recorded at the
lower of their carrying amount or estimated fair value (less costs to sell) at
the time the plan of disposition has been approved and committed to by the
appropriate company management. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 on December
30, 2001 (for more information see Note 1 of Notes to Financial Statements and
the discontinued operations section of this MD&A).
14
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS No. 146), the provisions of which are effective for any exit or disposal
activities initiated by the Company after December 31, 2002. SFAS No. 146
provides guidance on the recognition and measurement of liabilities associated
with exit or disposal activities and requires that such liabilities be
recognized when incurred. The adoption of the provisions of SFAS No. 146 will
impact the measurement and timing of costs associated with any exit and disposal
activities initiated after December 31, 2002. The Company does not expect the
adoption of the provisions of SFAS No. 146 to have a material effect on its
consolidated results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN 45
requires the Company to recognize an additional liability for the fair value of
an obligation assumed by issuing a guarantee. The disclosure provisions of FIN
45 are effective as of December 31, 2002. The provisions for initial recognition
and measurement of the liability are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. The Company does
not expect the adoption of the provisions of FIN 45 to have a material effect on
its consolidated results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46), which requires that the
primary beneficiary of a variable interest entity (VIE) consolidate the VIE. The
Company does not expect the adoption of the provisions of FIN 46 to have a
material effect on its consolidated results of operations or financial position.
Critical Accounting Policies:
The preparation of our consolidated financial statements in accordance with
generally accepted accounting principles is based on the selection and
application of accounting policies that require the Company to make significant
estimates and assumptions about the effect of matters that are inherently
uncertain. The Company considers the accounting policies discussed below to be
critical to the understanding of our financial statements. Actual results could
differ from our estimates and assumptions, and any such differences could be
material to our consolidated financial statements.
The Company did not initially adopt any accounting policies with a material
impact during 2002 other than the required adoption of SFAS No. 144.
Long Lived Assets (including Tangible and Definite Lived Intangible Assets).
The Company periodically evaluates the recoverability of the carrying amount of
its long lived assets (including property, plant and equipment and definite
lived intangible assets) whenever events or changes in circumstances indicate
that the carrying amount of a long lived asset group may not be fully
recoverable. These events or changes in circumstances include business plans and
forecasts, economic or competitive positions within an industry, as well as
current operating performance and anticipated future performance based on a
business' competitive position. An impairment is assessed when the undiscounted
expected future cash flows derived from an asset are less than its carrying
amount. Impairment losses are measured as the amount by which the carrying value
of a long lived asset exceeds its fair value and are recognized in earnings. The
Company continually applies its best judgment when applying the impairment rules
to determine the timing of the impairment test, the undiscounted cash flows used
to assess impairment, and the fair value of an impaired long lived asset group.
The dynamic economic environment in which our businesses operate and the
resulting assumptions used to estimate future cash flows impact the outcome of
all impaired tests. For information on recognized impairment charges see Note 1
of Notes to Financial Statements and the discontinued operations section of this
MD&A.
Interest Rate Swap
See Item 7a Quantitative and Qualitative Disclosure about Market Risk for
information about the Company's interest rate swap.
15
Forward Looking Statements
Except for historical information contained herein, statements contained
in this Form 10-K constitute forward-looking statements made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve material risks and uncertainties,
including, without limitation, statements as to management's beliefs,
strategies, plans, projections, expectations or opinions related to the
Company's future performance which are based on a number of assumptions that may
ultimately prove to be inaccurate.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk primarily associated with changes in
interest rates and foreign currency exchange rates. In order to manage the
volatility relating to interest rates, the Company has entered into an interest
rate swap agreement. In order to manage the volatility relating to foreign
currency exchange rates the Company denominates substantially all purchase and
sale transactions in U.S. dollars. The Company does not anticipate any material
changes in its primary market risk exposures in the near future.
The Company does not execute transactions or hold derivative financial
instruments for trading purposes.
INTEREST RATE RISK
The Company's primary market risks are fluctuations in interest rates and
variability in interest rate spread relationships (i.e., prime to LIBOR spreads)
on its bank debt and interest rate swap (see Note 8 to the Consolidated
Financial Statements). As of December 28, 2002, the Company had $7.2 million
outstanding subject to an interest rate swap. This swap is used to convert
floating rate debt relating to the Company's revolving credit agreement to fixed
rate debt to reduce the Company's exposure to interest rate fluctuations. The
net result was to substitute a fixed interest rate of 9.17% for the variable
rate. The swap amortizes by $75,000 per month and terminates in December 2007.
Under the interest rate environment during the year ended December 28, 2002, the
Company's interest rate swap agreement resulted in additional expense of
approximately $422,000.
The following table provides information about the Company's interest rate
swap agreement that is sensitive to changes in interest rates. The table
presents average notional amounts and weighted average interest rates by fiscal
year. Notional amounts are used to calculate the contractual cash flows to be
exchanged under the swap contract.
Fair
2003 2004 2005 2006 2007 Total Value
In Thousands
Interest Rate Swaps
Variable to Fixed (US$) 6,712 5,812 4,912 4,012 3,112 7,200 1,084
Average Pay Rate 9.17% 9.17% 9.17% 9.17% 9.17% 9.17%
Average Receive Rate 3.35% 3.86% 4.40% 4.82% 5.17%
The following table provides information about the Company's variable rate debt.
Fair
2003 2004 2005 2006 2007 Total Value
In Thousands
Debt:
Variable Rate (US$) 17,737 18,135 16,007 16,500 17,000 14,458 14,458
Average Interest Rate 3.75% 4.25% 4.75% 5.25% 6.25% 3.75%
16
The Company's management believes that fluctuations in interest rates in
the near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
FOREIGN CURRENCY RISK
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements from domestic companies with international
customers are denominated in U.S. dollars. Only a small fraction of the
Company's purchases are denominated in foreign currency. The Company purchases
approximately $2,000,000 of product monthly from its Chinese joint ventures,
which use proceeds thereof, to satisfy locally incurred liabilities in Renminbi
(RMB). Had there been an adverse 10% fluctuation between the exchange rate of
the U.S. dollar and the RMB, it would have resulted in a potential loss of
earnings of approximately $2.4 million at December 28, 2002. However, based upon
minimal historical volatility between the RMB and the U.S. Dollar, the Company
believes the likelihood of a significant potential loss in future earnings from
changes in the foreign currency exchange rate to be minimal.
17
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 28, 2002
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants........................................F-19
Consolidated Balance Sheets as of, December 28, 2002 and December 29, 2001................F-20
Consolidated Statements of Operations for the Years Ended
December 28, 2002, December 29, 2001 and December 30, 2000................................F-21
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 28, 2002, December 29, 2001 and December 30, 2000..........................F-22
Consolidated Statements of Cash Flows for the Years Ended
December 28, 2002, December 29, 2001 and December 30, 2000................................F-23
Notes to Consolidated Financial Statements...........................................F-24 - 45
18
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
General Bearing Corporation
We have audited the accompanying consolidated balance sheets of General Bearing
Corporation and subsidiaries as of December 28, 2002 and December 29, 2001, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
28, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Bearing
Corporation and subsidiaries as of December 28, 2002 and December 29, 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 28, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Urbach Kahn & Werlin LLP
New York, New York
April 8, 2003
F-19
General Bearing Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, except for shares and per share data)
================================================================================
December 28, December 29,
2002 2001
- -------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 3,158 $ 1,847
Accounts receivable, net of allowance for doubtful
accounts of $335 in 2002 and $874 in 2001 10,742 13,355
Inventories 28,218 30,116
Prepaid expenses and other current assets 4,368 4,756
Advances to affiliates 186 114
Deferred tax assets 2,427 631
- -------------------------------------------------------------------------------------------
Total current assets 49,099 50,819
- -------------------------------------------------------------------------------------------
Fixed assets, net of accumulated depreciation 21,308 22,049
- -------------------------------------------------------------------------------------------
Investment in, advances to and accounts receivable
from joint ventures and affiliates 3,670 2,841
- -------------------------------------------------------------------------------------------
Other assets 1,336 915
- -------------------------------------------------------------------------------------------
Total assets $ 75,413 $ 76,624
===========================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Notes payable - banks $ 7,114 $ 5,415
Bank - revolving line of credit 14,458 --
Accounts payable 7,127 9,781
Due to affiliates 1,696 306
Accrued expenses and other current liabilities 4,107 4,660
Current maturities of long term debt 396 381
- -------------------------------------------------------------------------------------------
Total current liabilities 34,898 20,543
- -------------------------------------------------------------------------------------------
Long term debt, net of current maturities 8,563 20,580
- -------------------------------------------------------------------------------------------
Other long term liabilities - affiliate 315 491
- -------------------------------------------------------------------------------------------
Deferred taxes 714 320
- -------------------------------------------------------------------------------------------
Minority interests 9,464 10,119
- -------------------------------------------------------------------------------------------
Commitments and contingencies (Note 16)
Stockholders' equity
Common shares - par value $.01 per share; authorized
19,000,000 shares; issued 7,102,200 and 7,088,950 shares 71 71
Paid-in capital 40,133 40,094
Accumulated other comprehensive loss (1,084) (737)
Treasury stock, at cost; 3,234,820 and 3,040,270 shares (996) (276)
Accumulated deficit (16,665) (14,581)
- -------------------------------------------------------------------------------------------
Total stockholders' equity 21,459 24,571
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 75,413 $ 76,624
===========================================================================================
See Notes to Consolidated Financial Statements
F-20
General Bearing Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands except for shares and per share data)
================================================================================
December 28, December 29, December 30,
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Sales $ 60,306 $ 44,474 $ 50,270
Cost of sales 43,151 31,272 34,722
- -------------------------------------------------------------------------------------------------------------------
Gross profit 17,155 13,202 15,548
Selling, general and administrative expenses 12,733 10,528 11,298
- -------------------------------------------------------------------------------------------------------------------
Operating income 4,422 2,674 4,250
Other expenses, net 1,797 1,689 343
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 2,625 985 3,907
Income taxes 1,105 212 1,363
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interests 1,520 773 2,544
Minority interests (672) (405) 8
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 848 368 2,552
- -------------------------------------------------------------------------------------------------------------------
Income / (loss) from discontinued operations (4,706) 506 (724)
Income tax benefit (expense) 1,774 (236) 51
- -------------------------------------------------------------------------------------------------------------------
Income / (loss) from discontinued operations (2,932) 270 (673)
- -------------------------------------------------------------------------------------------------------------------
Net income / (loss) $ (2,084) $ 638 $ 1,879
===================================================================================================================
Income per common share from continuing operations:
Basic $ 0.22 $ 0.09 $ 0.62
Diluted $ 0.22 $ 0.09 $ 0.62
Income / (loss) per common share from discontinued operations:
Basic $ (0.76) $ 0.07 $ (0.16)
Diluted $ (0.76) $ 0.07 $ (0.16)
Income / (loss) per common share from net income:
Basic $ (0.54) $ 0.16 $ 0.46
Diluted $ (0.54) $ 0.16 $ 0.46
Weighted average number of common shares:
Basic 3,867,380 4,108,993 4,109,565
Diluted 3,874,853 4,108,993 4,109,565
See Notes to Consolidated Financial Statements
F-21
General Bearing Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands except for shares)
================================================================================
Accumulated
Common Shares Other
-------------------- Comprehensive Paid-In Treasury Stock Comprehensive Accum.
Shares Amt. Income Capital Shares Amt. Income Deficit
===================================================================================================================================
Balance, January 1, 2000 7,064,950 $ 71 $ (7) $ 39,744 3,000,000 $ -- $ -- $ (15,004)
Shares issued - board
compensation 8,000 -- -- 43 -- -- -- --
Treasury shares, at cost -- -- -- -- 10,300 (51) -- --
Foreign currency translation
adjustment -- -- (3) -- -- -- (3) --
Distribution to WMC
shareholders -- -- -- -- -- -- -- (2,094)
Options exercised -- -- -- 207 (50,000) -- -- --
Net income -- -- -- -- -- -- 1,879 1,879
----------
Comprehensive income -- -- -- -- -- -- 1,876 --
---------- -------- ---------- ---------- ---------- --------- ---------- ----------
Balance, December 30, 2000 7,072,950 71 (10) 39,994 2,960,300 (51) -- (15,219)
Shares issued - board
compensation 16,000 -- -- 100 -- -- -- --
Treasury shares, at cost -- -- -- -- 79,970 (225) -- --
Net income -- -- -- -- -- -- 638 638
Mark to market - interest
rate swap -- -- (727) -- -- -- (727) --
---------- -------- ---------- ---------- ---------- --------- ---------- ----------
Comprehensive loss -- -- -- -- -- -- (89) --
---------- -------- ---------- ---------- ---------- --------- ---------- ----------
Balance, December 29, 2001 7,088,950 71 (737) 40,094 3,040,270 (276) -- (14,581)
Shares issued - board
compensation 12,000 -- -- 33 -- -- -- --
Options exercised 1,250 -- -- 6 -- -- -- --
Treasury shares, at cost -- -- -- -- 194,550 (720) -- --
Net loss -- -- -- -- -- -- (2,084) (2,084)
Adjust for change in
foreign currency -- -- 10 -- -- -- 10 --
Mark to market - interest
rate swap -- -- (357) -- -- -- (357) --
---------- -------- ---------- ---------- ---------- --------- ---------- ----------
Comprehensive loss -- -- -- -- -- -- (2,431) --
---------- -------- ---------- ---------- ---------- --------- ---------- ----------
Balance, December 28, 2002 7,102,200 $ 71 $ (1,084) $ 40,133 3,234,820 $ (996) -- $ (16,665)
===================================================================================================================================
See Notes to Consolidated Financial Statements
F-22
General Bearing Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
================================================================================
December December December
28, 2002 29, 2001 30, 2000
- -------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income / (loss) $(2,084) $ 638 $ 1,879
Adjustments to reconcile net income / (loss) to net cash
provided by operating activities:
Minority interests (834) 98 (1,628)
Depreciation and amortization 2,065 1,066 1,233
Loss on impairment of discontinued operations, net 3,965 -- --
Deferred income taxes (1,350) (142) 212
Equity in (income) loss of joint ventures and affiliates 193 (60) (669)
Net (gain) loss on equipment sales and disposal (24) 57 --
Other non - cash items charged to income 38 100 43
Changes in:
Accounts receivable 1,935 (1,522) 1,505
Inventories (3,899) 3,758 (4,202)
Prepaid expenses and other assets (830) 554 (124)
Advances to / (from) affiliates 1,163 999 369
Accounts payable and accrued expenses 2,008 (1,273) 2,938
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,346 4,273 1,556
- -------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investments in affiliates, net (820) -- (750)
Advances to affiliates -- (600) (2,597)
Increase in equity interests, net of cash acquired -- 1,986 --
Fixed asset purchases (6,587) (2,555) (948)
Proceeds from sale of fixed assets 33 100 --
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,374) (1,069) (4,295)
- -------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Repayment of capital lease (153) (181) (650)
Increase (decrease) in note payable - banks 5,701 440 (3,459)
Decrease in note payable - other (200) -- --
Net proceeds from / (repayment of) revolving credit facility 1,711 (2,006) 3,347
Proceeds from equipment financing -- -- 968
Proceeds from long-term debt -- 118 --
Proceeds from sale of common shares -- -- 5
Return of capital -- -- (500)
Purchase of treasury stock (720) (225) (51)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,339 (1,854) (340)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,311 1,350 (3,079)
Cash and cash equivalents, beginning of period 1,847 497 3,576
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,158 $ 1,847 $ 497
=======================================================================================================
See Notes to Consolidated Financial Statements
F-23
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies
The Company
General Bearing Corporation ("General") and subsidiaries
(collectively, "the Company") operates in two business segments:
bearings and machine tools. In December of 2002, the Company's Board
of Directors and management resolved to discontinue the operations
of the machine tool segment by disposing of the net assets by sale
during 2003. Subsequent to SFAS No. 144, prior year financial
statements of the Company have been reclassified to segregate
discontinued operations from continuing operations.
>> Continuing Operations (Bearing Segment). The Company, through
General and its 50% or more owned joint ventures, Rockland
Manufacturing Company ("Rockland"), Ningbo General Bearing
Company, Ltd. ("NGBC") and Jiangsu General Ball and Roller
Company, Ltd. ("JGBR"), manufactures, sources, assembles and
distributes a variety of bearings and bearing components,
including ball bearings, tapered roller bearings, spherical
roller bearings and cylindrical roller bearings. Under the
Hyatt(R) and The General(R) trademarks, the Company supplies
original equipment manufacturers ("OEMs") and the industrial
aftermarket, both primarily in the United States and Asia. The
Company's products are used in a broad range of applications,
including automobiles, railroad cars, locomotives, trucks,
heavy duty truck trailers, office equipment, machinery and
appliances.
>> Discontinued Operations (Machine Tool Segment). The Company
manufactures machine tools through its majority owned
subsidiary World Machinery Works ("W.M. Works"). The Company,
through WMW Machinery Company, Inc. ("WMW"), a wholly-owned
subsidiary of General, distributes machine tools in North
America. The Company also distributes machine tools in other
countries through its majority-owned subsidiary, World
Machinery Group, BV ("WMG").
Based on several years of disappointing performance of the
machine tool segment and the Company's desire to focus its
resources on its core business, the Company's Board of
Directors and management resolved to discontinue the
operations of the segment by disposing of the net assets by
sale in 2003. During 2002, the Company reduced the net asset
carrying amounts of machine tools to zero and recorded an
impairment writedown associated with discontinued operations
of approximately $2,242,000.
Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of General, its wholly owned
subsidiaries and all joint ventures in which General maintains
control and has at least a 50% ownership share. The Consolidated
Statements of Operations have been restated to reflect the results
from discontinued operations of the machine tool segment as a single
line item for all years presented. Investments in other joint
ventures are carried under the equity method. The years ended
December 28, 2002, December 29, 2001, and December 30, 2000 are
referred to as fiscal 2002, fiscal 2001, and fiscal 2000,
respectively.
A summary description of each of the Company's wholly owned
subsidiaries and joint ventures in which General maintains control
and has at least a 50% ownership interest are as follows:
F-24
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Continuing Operations:
NGBC, established in 1998 for an initial term of sixteen years, is a
joint venture with China Ningbo Genda Bearing Company, Ltd. Located
in Yuyao City, Peoples Republic of China (PRC), this venture
manufactures ball and roller bearings and their components.
Initially a 33% owned joint venture of General, General increased
its ownership to 42% in 2000 by contributing an additional $650,000
in cash. In July 2001, General increased its ownership to 50% by
contributing $1.2 million in cash and General assumed control of
management of the operations. Operations since July 2001 have been
fully consolidated in the financial statements. Upon expiration or
early termination of the business term, assets will be distributed
to the partners in the same proportion as their respective paid
investments to the registered capital.
NN General, LLC ("NNG") established in March 2000, was initially a
50% owned joint venture with NN Ball & Roller, Inc. ("NN"), an
unrelated party. Pursuant to the terms of this venture General
assigned its 60% interest in JGBR to NNG. General's initial cash
investment in NNG was $100,000. General also advanced NNG loans
amounting to approximately $2,767,000 including interest at the
applicable federal rate. On December 27, 2001, General and NN
contributed all loans and accrued interest advanced to NNG to NNG's
capital and General purchased NN's 50% interest for cash and notes
valued at approximately $3.9 million (book value), effectively
increasing General's interest in JGBR back to 60%. On June 30, 2002,
NNG's ownership in JGBR was reduced to 51% by agreement of the
partners, and in conjunction with commitments by the partners to
contribute additional capital reflective of the new ownership
percentages.
JGBR, established in 1999, is a joint venture with Jiangsu Lixing
Steel Ball Factory ("JSBF"), an unrelated party. Located in Rugao
City, China, this venture is comprised of the operations of JSBF, a
manufacturer of rolling elements for bearings. Effective with
General's acquisition of NN's interest in NNG, the operations of
JGBR have been fully consolidated.
Rockland, a general partnership, is owned equally by General and
Wafangdian USA, Inc., a wholly owned subsidiary of Wafangdian
Bearing Company, Ltd. ("WFGDN"). Rockland's principal business is
the design and manufacture of cylindrical roller and spherical
roller bearings and bearing components. Substantially all of
Rockland's inventory (see below) is purchased on a consigned basis
from WFGDN, or Wafangdian General Bearing Company, Ltd. ("WGBC", see
below), a foreign joint venture in which General owns a minority
interest. Substantially all of Rockland's production is sold to
General.
General IKL Corporation ("IKL") is an inactive joint venture located
in the former Republic of Yugoslavia in which General holds a 50%
interest.
World Machinery Company ("World") is a holding company and is 100%
owned by General. World exists primarily to hold stock of other
companies. World owns 2,950,000 shares of General's common stock
which have been treated as treasury stock in the consolidated
financial statements.
Discontinued Operations:
WMW is a wholly owned subsidiary of World. WMW is engaged in the
distribution of machines and machine tools in North America,
principally to machine tool dealers and manufacturing companies.
WMG is a 60% owned joint venture of World located in the
Netherlands, whose principal asset is a 60% interest in W.M. Works,
a Romanian manufacturer of machine tools acquired during 1998
pursuant to Romania's privatization program. The majority of W.M.
Works' sales are made through WMG, which utilizes independent
regional sales agencies.
F-25
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Revenues for discontinued operations for each of the three years in
the period ended December 28, 2002 were $8,613,000, $11,179,000 and
$9,123,000, respectively.
A summary of joint ventures (all in continuing operations) in which
the Company holds less than a 50% interest are as follows:
Shanghai General Bearing Company, Ltd. ("SGBC") was established in
1987 as a 25% owned joint venture with Shanghai Roller Bearing
Factory ("SRBF"), located in Shanghai, PRC. The venture is a limited
liability company formed in accordance with PRC law. SGBC produces
tapered roller bearings, which the Company imports into the U.S. for
further assembly, inspection, testing and distribution. In November
2001, General and SRBF agreed to a new joint venture contract
whereby ownership would be shared equally, with General assuming
control of operations upon General meeting its requirement to
contribute an additional $3 million through 2004. At March 24, 2003,
General has satisfied $2 million of this requirement. The official
business license for the revised joint venture company was granted
in February 2002. General maintains the exclusive right to sell the
products of SGBC in the United States.
Shanghai Pudong General Bearing Company, Ltd ("SPGBC") is a 25%
owned joint venture with Shanghai Xiua Industrial Corporation,
established in 1996. Located in the Pudong Industrial Zone of
Shanghai, China, this venture produces ball bearings for sale in the
U.S. by General.
WGBC is a 25% owned joint venture with Wafangdian Bearing Company.
This venture produces components for spherical roller bearings and
railroad bearings in the PRC. General sells WGBC's products in the
United States.
All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents: The Company considers all investments in highly
liquid debt instruments with maturities of three months or less from
date of purchase and money market funds to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Rockland maintains the right to return all unsold inventory and is
obligated to remit payment for inventory only upon sale.
Accordingly, the Company treats these materials to be inventory held
on consignment and has not recorded them in inventory at December
28, 2002, December 29, 2001 and December 30, 2000. Inventory at
December 28, 2002 and December 29, 2001 consists of approximately
$1,686,000 and $1,494,000, respectively, of inventory acquired
outside the consignment agreement and costs related to consigned
goods. The consigned inventory amounted to approximately $2,604,000
and $3,194,000 at December 28, 2002 and December 29, 2001,
respectively.
Comprehensive Income: Comprehensive income refers to revenue,
expenses, gains and losses that under generally accepted accounting
principles are excluded from net income, as these amounts are
recorded directly as adjustments to stockholders' equity. The
Company's comprehensive income is comprised of foreign currency
translation adjustments and accounting for an interest rate swap.
The Company uses an interest rate swap agreement as a derivative to
hedge against the variable interest rate on a portion of its
revolving credit facility, to reduce its exposure to fluctuations in
interest rates. The Company's accounting policies for these
instruments are based on its designation of such instruments as
hedging transactions. The Company does not enter into such contracts
for speculative purposes. The Company records all derivatives on the
balance sheet at fair value.
F-26
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
For derivative instruments that are designated and qualify as a fair
value hedge (i.e. hedging the exposure to changes in the fair value
of an asset or a liability or an identified portion thereof that is
attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting gain or loss on the
hedged item attributable to the hedged risk are recognized in
earnings in the current period. For derivative instruments that are
designated and qualify as a cash flow hedge, such as the swap
agreement, (i.e. hedging the exposure of variability of expected
future cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument
is reported as a component of Accumulated Comprehensive Income (a
component of stockholders' equity) and reclassified into earnings in
the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative
instrument, if any (i.e. the ineffective portion of any portion of
the derivative excluded from the assessment of effectiveness) is
recognized in earnings in the current period. For derivative
instruments not designated as hedged instruments, changes in their
fair values are recognized in earnings in the current period.
Comprehensive income for each of the three years in the period ended
December 28, 2002 is presented in the Statements of Changes in
Stockholders' Equity.
Fixed Assets: The cost of depreciable plant and equipment is
depreciated for financial reporting purposes over the estimated
useful lives using the straight-line or declining balance methods.
The estimated lives for each property classification are as follows:
Classification Estimated Life (Years)
--------------------------------------------------------------------
Land No depreciation
Buildings 10 to 40
Machinery and equipment 3 to 10
Furniture and fixtures 10
Transportation equipment 3 to 5
Leasehold improvements Lesser of life of lease or useful life
Software 5
--------------------------------------------------------------------
Expenditures for maintenance, repairs and minor renewals or
betterments are charged against income. Major renewals and
replacements are capitalized.
Evaluating Recoverability of Long Lived Assets: The Company reviews
the carrying values of its long lived and identifiable intangible
assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable. The Company assesses recoverability of these
assets by estimating future nondiscounted cash flows. Any long lived
assets held for disposal are reported at the lower of their carrying
amounts or fair value less cost to sell. During 2000, the Company
recorded an impairment writedown of $501,000. During 2002, the
Company recorded an impairment writedown, net of related tax
effects, on assets associated with discontinued operations of
approximately $2,242,000.
Fiscal Year: The reporting period for the Company is a 52-53 week
fiscal year. There were 52 weeks in the periods ended December 28,
2002, December 29, 2001 and December 30, 2000.
Revenue Recognition: The Company recognizes revenue when products
are shipped and title passes to the customer. Selling prices are
fixed based on purchase orders or contractual arrangements. Customer
acceptance and account collectibility can be reasonably assured as
write-offs of accounts receivable have historically been low. The
Company provides, as a reduction in sales, for anticipated returns
and allowances on defective merchandise based on known claims and an
estimate of anticipated returns in accordance with SFAS No 5.
F-27
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Shipping and Handling Costs: The Company accounts for certain
shipping and handling costs as a component of "Selling, general and
administrative expenses." These costs represent primarily the
freight and direct compensation costs of employees who pick, pack
and otherwise prepare, if necessary, merchandise for shipment to the
Company's customers. Total costs were $1,200,000, $644,000, and
$671,000 in fiscal 2002, 2001 and 2000, respectively.
Advertising: Advertising costs are expensed as incurred. Advertising
expense for each of the three years in the period ended December 28,
2002 was $91,000, $150,000, and $228,000, respectively.
Income Taxes: Prior to the transaction described in Note 2, General
filed a consolidated Federal income tax return with World through
the date of its initial public offering, completed in February,
1997; thereafter, it filed its own federal returns. State and local
tax returns are filed separately. Federal income taxes were
calculated as if General filed its tax return on a separate return
basis for all periods presented. World filed a consolidated federal
income tax return with its wholly owned subsidiaries and separate
state and local tax returns. Subsequent to the transaction described
in Note 2, the Company files a consolidated Federal income tax
return.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and operating loss carryforwards.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Estimated Fair Value of Financial Instruments: Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure About
Fair Value of Financial Instruments", requires disclosures of fair
value information about financial instruments, for which it is
practicable to estimate the value, whether or not recognized on the
balance sheet.
The fair value of financial instruments, including cash, accounts
receivable and accounts payable, approximate their carrying value
because of the current nature of these instruments. The carrying
amounts of the Company's note payable - bank and long-term debt -
bank approximate fair value because the interest rates on these
instruments are subject to changes with market interest rates. To
reduce its exposure to fluctuations in interest rates, the Company
is party to an interest rate swap with its bank (Note 8). It is not
practical to determine the fair value of receivables from, payables
to and long-term debt payable to affiliates and other because of the
nature of their terms.
Concentration of Credit and Other Risk: The Company extends credit
based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. The Company obtained
76%, 76%, and 85% of its bearing and component requirements from
various Chinese joint ventures in the fiscal years ended 2002, 2001
and 2000, respectively. In 2002, 2001 and 2000, respectively, the
Company obtained 57%, 51% and 87% of its machine tool requirements
from various companies in Romania.
Cash accounts at financial institutions from time to time may exceed
the federal depository insurance coverage limit.
F-28
General Bearing Corporation and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Note 1. The Company and Summary of Significant Accounting Policies,
(Continued)
Foreign Currency Translation: Foreign currency financial statements
of foreign operations where the local currency is the functional
currency are translated using exchange rates in effect a